Friday, May 2, 2014

James Galbraith on the Essence of Keynes’ View of Labour Demand

Actually in a comment on Simon Wren-Lewis’ blog, but it is wonderfully succinct:

“Chapter Two of the General Theory abolished the supply curve of labor, hence the ‘labor market’, and transferred the determination of employment to the domain of effective demand. Businesses hire when they can sell the goods that their employees make, and not otherwise. Any model with a ‘labor market’ is an anti-Keynesian model.”
James Galbraith, 1 May 2014
http://mainlymacro.blogspot.com/2014/05/looking-for-flimflam.html?showComment=1398984424960#c8525283137465438205

Just for context, James Galbraith made this comment as a criticism of New Keynesian economic models.

Marc Lavoie makes the same point:

“Ironically the major aspect of the post-Keynesian view of labour markets is that such markets do not really exist. Whereas one may admit that there is a market for peanuts or for bananas, with well-behaved supply and demand curves, the same hypothesis cannot be made in the case of labour.” (Lavoie 1992: 217).

Update
Lars Syll also quotes Galbraith’s comment in full below, and the comments section is worth reading too:

"if wages NEVER move then why call them sticky? Wage stickiness implies that they are fixed in the short-run and flexible in the long-run. But what IS this mysterious long-run you speak of? You and I both know that the long-run has practical policy implications in New Keynesian macro (i.e. fiscal policy is ineffective in the long run and the government budget should balance over the cycle). But when DOES this long run take effect? When do wages adjust in this long run scenario? It sounds like metaphysics to me."http://larspsyll.wordpress.com/2014/05/02/james-galbraith-on-flim-flamming-new-keynesianism/#comment-12445--------------Brilliant comment.

Surely the same thing can be said about prices too? Where is the evidence that prices are flexible in the long run? It verges on metaphysics/theological faith.

" transferred the determination of employment to the domain of effective demand. Businesses hire when they can sell the goods that their employees make, and not otherwise"

To go further and state " the major aspect of the post-Keynesian view of labour markets is that such markets do not really exist." is probably a bit of an overstatement (when the demand for bricklayers increases the wage of bricklayers actually does increase).

LK, yes, the same is true of prices. The invocation of the mysterious "long-run" is beyond superstition. And yet it leads New Keynesians to say that the government budget should be balanced over the cycle.

Hmmm. Our department has hired like mad as we ramp a multi year redesign of our product definition and pricing engine (mark up pricing btw). No new stuff being made. This is a capital investment, and we hire developers through subcontractors and negotiate price.

No, we are writing a software system. It will be used to create (insurance like) products. Those we expect to sell. So there is some indirection here (lengthening of the production chain :) ) . But if you are asking is the goal to facilitate cheaper "production" of these products or greater sales volumes, certainly the latter.